TVHEhttp://www.tvhe.co.nz
The Visible Hand in EconomicsSat, 19 Jan 2019 19:22:13 +0000en-GBhourly1https://wordpress.org/?v=4.9.93590215Upcoming blog changeshttp://www.tvhe.co.nz/2018/10/02/upcoming-blog-changes/
Mon, 01 Oct 2018 19:30:56 +0000http://www.tvhe.co.nz/?p=13177Hi everyone. You may have noticed a flurry of activity in the blog over the last two weeks – this is because I moved two months of planned activity forward so it would be finished by the end of September.

I am going to have to leave the blog for a while in order to focus my attention on other things from today – so for the foreseeable future I will not be writing or commenting here.

However, some students at Victoria University of Wellington have stated that they are keen to set up an Economic Club at Victoria. As part of this some students are likely to put up posts here – giving the blog a fresh start with some new, more novel, voices. Once the club is set up there will likely be a post here – you don’t have to be a student to join, and I hear they are looking at setting up monthly presentations from economists on a range of topical issues.

I have had a lot of fun writing here again, and I’m sure that one day I’ll have something to say. But I like the idea that some Young (Economics) Turks will turn up to disrupt economic thinking on this site – and hopefully help us all think a bit more critically about economics ideas we’ve taken as given.

Make of this what you will. I think reading it as Smith underplaying morality is unfair – but reading it as economic language/narratives being used to underplay important moral arguments that may be necessary for important coordination games is fair.

When I was recently asked who my favourite economist was I named my partner, but pointed out Tirole was a close second. I also discovered my third fav, Dixon, is on twitter. Both Tirole and Dixon use standard economics models to explain things we observe while focusing on the types of assumptions we make and their credibility – they use models for clarity of exposition, and I love it.

]]>13095Use value, exchange value, and “cost”http://www.tvhe.co.nz/2018/09/28/use-value-exchange-value-and-cost/
Thu, 27 Sep 2018 20:30:11 +0000http://www.tvhe.co.nz/?p=13037When writing this post I found myself a bit uncomfortable with terminology like “use value” and “exchange value” and so steered away from them – well also because a production function approach to the question is just so much damned clearer! Exchange value was fine, but use value I found a bit confusing – as I always wanted it to be defined either in terms of the buyer (their utility) or the seller, and even in terms of the seller are we talking about the price they sell at or their full economic cost (which includes the opportunity cost). This especially frustrated me as I know that 13 year old me used these terms all the time.

Now I think I have a clear idea on it all again, so I’m just noting this down so I can look it up in the future!

Use value: Read this as utility Matt. It is the value of the person using it.

Exchange value: Price.

You’ll notice something is missing here when I talked production functions though … the actual supply of goods and services.

Right ok, how does this all fit into a supply and demand graph? Well, the use values are points on the demand curve for each product purchased, the exchange value is the market price. This gives us consumer surplus (the difference between the exchange value and the use value). Cool.

Then we have producer surplus, as the way the exchange value is above the price necessary to get producers to sell the product. At each point on the supply curve/marginal cost curve a producer is willing to sell that product individually (covers their costs – including wages – and opportunity cost, which includes a required rate of return) but they receive the market price. The difference between firm structures (monopoly, perfect competition) is determines where this market price is set – not how the MC curve looks (although X-inefficiency would disagree here).

So producer surplus goes to producers. Is that funamentally unjust, I mean we haven’t actually made a model of how wages are determined here so I don’t think we can describe it. The “marginal cost” function that leads to producer surplus has an embedded wage rate which may – in of itself – involve labour receiving surplus value from the production process. Let us not forget that we need to consider this labour market.

Hence why Marxist factor shares depend on a view about subsistence wages – and sometimes a peripheral view that this surplus is immediately capitalised and can be viewed as a “rent” that is used to accumulate more capital. But to discuss this we need a general idea about how “steep” supply curves are. What happens if supply curves are very flat, something you may expect in a situation with constant returns to scale … well producer surplus will not occur in the long run and the “scale” of the firm is determined by demand.

Matt, overall I still think talking in terms of market imperfects and imbalances of bargaining power is a bit more useful than trying to find a “fundamental law” or “contradiction in capitalism”. Although I know that terminology is popular now (Piketty review, and added notes) lets stay away from it.

]]>13037Heterogeneity matters: Why remembering people are different is important for thinking about outcomeshttp://www.tvhe.co.nz/2018/09/27/heterogeneity-matters-why-remembering-people-are-different-is-important-for-thinking-about-outcomes/
Wed, 26 Sep 2018 20:30:59 +0000http://www.tvhe.co.nz/?p=13032When I was a student a lecturer said to us “When analysing trade, does it make sense for us to assume everyone is the same? If everyone was the same why would they trade with each other?“. This is simultaneous a bit of a silly question and a useful one.

He answered that they wouldn’t, and went on about something – but in truth it is because of his definition of “same” with regards to the model he was describing. He was looking at a GE model with people with the “same” endowments and preferences – and yeah sure in that model there is no trade. But this ignores the idea of production entirely – even if we have the same preferences and same “characteristics” (in terms of the hours we are endowed with and our ability to turn those into leisure or output), the existence of a production process with specialisation implies that there is benefit from specialising and then trading. This division of labour is pretty central to our understanding of trade, so we shouldn’t really look past it.

But it raises something important as well. We need to describe why people are trading, and what exactly is driving that process, before we can evaluate anything. Let’s make a quick framework that will help us do that!

Why are we trading then?

Ok, we trade for one reason – someone who has something values it less than someone who buys it [Note: Those explanations of value in the Wikipedia article are atrocious – the description at the top is what I’m linking to]. This says nothing of the process that leads to these relative values, or the harm or benefit that trade may have on other people uninvolved in the transaction. All it tells us is that these differences in value give the reason for trade.

If there are three of us sitting around, there are 9 chocolate bars (3 Moros, 3 Mars bars, and 3 Snickers), and we all value varying chocolate bars the same way (a Moro, Mars bar, and Snickers each give us the same level of utility, but we also have the same type of diminishing marginal utility from either) then we can think about trade. If we are each endowed with 1 of each bar we will not trade. If we are each endowed with 3 of one bar, then there are gains from trade – and a trade with equal bargaining power will see us go from an endowment of 3 of 1 chocolate bar to having 1 of each of the 3 chocolate bars!

Now if there is production, the existence of the division of labour suggests we can make more by focusing on only making one thing – or one element of one thing. Given this we are paid money incomes which we can use to trade with other people specialising. Our decision to work gives us money incomes, we then trade these money incomes for products from the firms that organised us blah blah blah. The key thing is NOTHING here requires that people are different – instead people are doing different things because of the institutional structure of the economy alone.

How can we be different in ways that may cause trade without specialisation though? There are three ways:

We have different preferences over things (goods and services, leisure, chocolate bars) – we differ in how we turn the observed products, and the endowment of hours we have which we spend on “leisure/home production”, into utility.

We have varying abilities to turn our time into goods and services, both in a relative sense (what am I good at making?) and an absolute sense – we differ in terms of how we turn our endowment of hours that are spent on remunerated work into products. [Note: I state products rather than incomes, as the income we are remunerated with for producing may in turn vary from our contribution to output due to institutional structure.]

We vary in terms of our non-income generating and non-utility from consumption generating characteristics – what we commonly think of as “endowments”, even though our preferences and ability to work are also endowments in a sense. Think here the wealth we start off with when we are born, or start off in a society where there is a safety net so we don’t face the risk of starvation. However, to get that trade the endowment must vary from the set of things that the individual values … that is the example of clustered chocolate bars before.

Ok that is nice, we have extra reasons why we may observe trade. But are patterns of trade fair?

Are patterns of trade fair?

So here we can try another framework. Why might we get different outcomes?

If everyone is exactly the same and we have different outcomes, then this appears unjust.

If peoples preferences differ and we have different outcomes then we don’t know – if we have equal outcomes this is unjust.

If some people are better at making things then others and we have different outcomes then we don’t know – if we have equal outcomes then we don’t know either.

We can start to see some threads coming through if we can agree with the above statements. Horizontal equity appears as, since everyone is exactly the same varying outcomes solely imply differential treatment by society.

With the second one things are difficult. People actually enjoy different things and make different choices. Some people like to work and consume, some people despise working and don’t value consumption much – these people are allowed to make different choices. Forcing people who want to do different things to do the same thing is unjust.

The last one is where things get difficult. We need to ask “why are some people better at making some things than others”? Are they endowed with natural talents? If so, they are endowed with something by luck that is giving them higher life satisfaction – is that fair? If not is it the responsibility of government to make it fair? If so what will happen to the behaviour of this person if we reduce the income they receive from doing that production – will they decide to work less or take more leisure?

What happens if, instead of natural talents we are talking about someone who undertook extra training, or someone who has been in the labour force longer … how do our answers change as the REASON for the difference changes!

In this last example we get a lot of the trade-offs that we argue about when discussing policy all the time – is redistribution just? Even if it is just in terms of distribution, what about if it leads to less being produced overall?

This can lead to the argument regardingdeserving vs undeserving poor – someone with a lifetime disability as compared to someone who could work but sits around playing Fifa 19.

Importantly, how do our answers change once we shift the question to why people may make a higher income from their role – is that solely the response of them creating more, or is there something to do with the institutional structure. What happens if, as a white man, I am just paid more than a different group?

As soon as we introduce heterogeneity we find that some inequality is actually good, but we also find that types of injustices differ greatly based on the differences between people – something that is incredibly important and gets ignored when some loud mouth like me makes a statement like “replace the minimum wage with a minimum income“. Policies have different ethical principles embedded in them, and we should be trying to ask about those when we decide what types of policies we support in a society like New Zealand.

This is why I’m an incrementalist – instead of trying to grab a measure of wellbeing and maximising it, I’d prefer we try to figure out what equity/fairness principles are relevant to people in society, and to ask what the policy trade-offs would be when trying to correct for observed injustices. My unpopular opinion among many economists is that a lot of New Zealand’s policy settings are actually pretty good when we ask these sorts of questions … hence why incremental change rather than some type of Big Kahuna is appropriate where we are at the moment.

Although if you want to disagree with me in comments, and provide some arguments why, I’d enjoy it

Unions are an interesting topic, but are also inseparable from a discussion about the relative welfare state and competition policy embedded in a nation. Nordic and German trade unions are quite different from the trade unions of the US, UK, and Australiasia – and any evaluation of an institution in this way requires a model that allows us to represent the institution relative to other institutions in the economy, the way individuals behaviour relates to that, and how the outcomes for individuals will vary.

So does anyone want to do some of that in the comments below? I will hopefully be writing up some things on these issues over time – but as a starting point for discussion I will put up this oversimplification. Unions help to correct issues of insufficient bargaining power for labour, but like any monopoly their existence leads to deadweight losses which hurt those outside of the unionised industry, and are unfair to capital owners in competitive markets. Evaluating whether more unionisation is good relies on comparing the costs and benefits given in this oversimplification.

I will be using this model myself next week to talk about migration (opps post timing changed and that was already up), so lets have some fun talking about this.

Originally I was going to title this “why Twitter doesn’t understand the purpose of models” – but it might make it sound like I agree with this model when I don’t. I do want to point out that I am not defending the tweeters complaining about LRAS being vertical – as they have betrayed a misunderstanding about what it represents.

This is long run aggregate supply curve, which is apparently vertical.

It means “if prices were higher, we assume that in the long run the factor markets adjust so that all relative prices are unchanged” – in other words the long-run neutrality of money, or an assumption about the transition paths of shifts in the short-run curves. The “cause” of the price change may stop that from happening, which is shown by shifting the curve – the appropriateness of this depends on the question asked but starting with a vertical LRAS is pretty innocuous by itself. It is not saying that nothing changes LRAS, it is saying that changes in LRAS are exogenous (or that a change in the price level of everything by itself won’t change output) – if the price of all goods and services and the price paid to factors (eg wages) all doubled then why would the amount produced differ … starting with the assumption that it wouldn’t is not that wild.

Now, lets get to why this is bad modelling, but then why it is better than the alternative finger in the air.

The model

I can’t read this text book, so my assumptions are as follows. The AD curve is a representation of a standard goods and money market equilibrium, the LRAS curve is all the points where the SRAS settles following a change in prices, where the SRAS curve is the choice of production and prices by firms for fixed factor input costs.

We can view the LRAS as some “aggregate production function” for an economy, and AD as aggregate expenditure which is linked to prices either due to the traditional reasons (liquidity preference, Pigou effects) or in the current treatment a monetary policy rule. In the long run what we produce is determined by the countries ability to produce and this AD curve determines prices – but because factor prices (specifically wages) are slow to adjust there can be cycles.

The model is definitely not the greatest at explaining cycles – heterogeneity, economic frictions, expectations, multiple-equilibrium, dynamics of the model when including growth … these things are all sort of rammed in on the side. But it is not that bad if we are trying to get an overarching idea of “what could have happened to explain what we observed”.

So they have a leftward shift in the LRAS and a leftward shift in AD. Ignore the curves have 2008 put on it – that is quite bad, especially for LRAS as it does imply that the long-run path was determined following the shock, which is not true. Pretend they say “2018”. Here these shifts explain the observed facts – prices moved sideways and output (relative to trend) remained low.

In essence yes, these shifts MUST have happened to explain the data (as long as these concepts are useful in describing the long-run tendency of the economy). It is a comparative static exercise – the data itself is only consistent with a situation where LRAS has shifted left and AD has shifted left. However, this begs the questions “why” and “what does that actually mean”.

Why it is bad for the question at hand

Ok, so we want to explain the GFC. What does this model tell us about the GFC.

It tells us that we need to explain why prices didn’t rise or fall but output relative to trend has stayed lower …

It achieves this by positing that the amount that can be produced by resources in the economy is lower.

Well why? And how is policy associated with this?

The actual thing we are trying to explain, and where we would like some policy pointers, is exogenous in this model, and so other than describing what the data is, and the “types” of changes that must be consistent with it it will tell us nothing.

If we want to explain something, we then need to build a model of that … the AD-AS framework is not built for this.

What is the point of AD-AS

AD-AS comes from describing the circular flow, and trying to figure out what will happen to prices and output following a specific shock. Given that, we can talk about the idea of stabilisation policy – which in itself is just another “AD shock”. There are heaps of good criticisms of its effectiveness for this role, and whether it captures the true nature of such policies. And it is good to debate those. But that is what the model is intended for.

Now it is also useful for saying “here is another economic concept”. For example, economic growth. But would we really want a model where we just shift out the LRAS curve and say that is growth … because that is all we would do. Here exogenous growth theory was an admission that we don’t understand what actually causes growth, but we can analyse the dynamics of economic indicators if growth was to occur.

Given that this doesn’t answer anything about how policy influences growth (which is a question people are interested in) the development of endogenous growth theory was useful. Here the process of growth is determined by a process explained in the model. Of course the key issue is that the endogenous theory doesn’t explain the data (on conditional convergence) as well as treating it as an external shock – indicating that growth theory needed more thought, which is what the entire field of growth economics does!

AD-AS is great for outlining what economic questions are, and giving a way of thinking about what a question refers to in terms of the SHOCKS it would involve to explain the data. It is a teaching tool. But it doesn’t actually tell us “this is the cause of the financial crisis” – and if the LRAS just shifts it doesn’t tell us anything about what this has to do with policy.

I teach AD-AS at 100 level, and I start the course by stating that we are trying to describe data from the Great Depression using the framework of the circular flow – I point out areas where the model doesn’t fit the data, the problems with the assumptions we make, and how introducing new assumptions (such as expectations) change our results. This model acts as an introduction to thinking about economic aggregates and principles, not as a general theory of the economy.

The purpose of such a framework is to allow us to think critically about “why” something happened, and to in turn try to model that “why” and test it against data. In that why there is nothing wrong with that diagram – instead the problem is with the conclusions they make when discussing it in later slides, which involve using conjecture that fits their prejudice to explain the shifts, rather than model and data which are necessary.

But the advantage of them using AD-AS to do this is that the bad assumptions they make, and the bad conclusions they get from them, are transparent. Unlike a lot of discourse about the financial crisis, which involves people running themselves in verbal circles to try to fit whatever they believe, a model forces you to show your (assumptions) hand.

Hating on the entire model because their conclusions are poor is dumb – show you understand the basic model, and clearly articulate where their description falls down!

Yup I can see why stating that the reduction in LRAS is just due to financial intermediation breaking down is inappropriate. But the point is that they should be describing the process that led to this comparative static change in more detail, and with more potential causes – not that the graphical representation that starts that conversation was inherently wrong.

This is 100 level economics, people are just learning about the terms and issues and should be taught how to build a framework that allows for critical thinking – and which forces that thinking to be disciplined by data. That is exactly what this graph CAN do, and how it should be taught … but just because our pet explanation for a single phenomenon isn’t the centrepiece of the conversation we don’t like it? Is that it, or am I misreading people here?

]]>13066Migration and wages: A model that is wrong but usefulhttp://www.tvhe.co.nz/2018/09/24/migration-and-wages-a-model-that-is-wrong-but-useful/
Sun, 23 Sep 2018 20:30:12 +0000http://www.tvhe.co.nz/?p=13040The link between migration and wages is complex and confusing – especially when it is often communicated about in different ways (eg are we talking about wage growth now with regards to monetary policy, wages in specific industries due to the changing make-up of the economy, or long-run real wages?). And I can’t be much help here.

However, I think this is one place where carefully using the macroeconomic model taught in ECON101 can help us to think about the issues a little bit – especially if we are narrowing the question to only “what is the monetary policy consequences of changes in migration flows“. Now this model is wrong, assumptions in it are wrong, the outcomes it describes aren’t forecasts – but it clearly articulates tendencies we observe following a change in economic circumstances which will hold in more realistic models, and clarifies assumptions that may make these tendencies false. We have pointed at this before for monetary policy – but lets outline a bit more now.

It is a model for thinking about the potential consequences of something in a critical way – not something that we accept uncritically as truth. To me this is pretty damned useful as a way to start thinking about something, so let’s do it!

The basic ECON101 macroeconomic model takes our friendly circular flow, with households as the group that demands final goods and services and that supplies factors of production, and firms as the other side of these markets (a set of technology that creates final goods and services from factors of production to “maximise profit” in some way). Sweet.

So when we talk about Aggregate Demand we are talking about all sources of expenditure on final goods and services produced in a country at a given price level. Recognising that income=expenditure in our circular flow, and the AD curve tells us what level this is consistent at for a given price level, we are not talking about the idea that people just want stuff at a given price level (microeconomic demand) – we are simply saying that, if we have that price level and that level of output total expenditure of households is equal to the amount produced by firms. Still, we won’t dwell on this here.

When we talk about Aggregate Supply we are thinking about the “supply” of factors of production. When we put it this way the typical upward sloping Aggregate Supply curve seems strange – and truly it is! So lets think about what we are talking about here. With AD we stated that we were looking at the choice of households to demand and firms to supply output at a given price level, this is “equilibrium” for us. But we don’t know what point on this curve gets chosen! To get there we need to consider that there is also a choice that depends on the actual decisions of firms to buy factors of production and households to supply them. As the price level (relative to factor costs) rises firms are willing to make more – cool. But firms also need a way to source more factors of production at that fixed price.

In a sense, when we have an upward sloping AS curve we are saying that, as prices rise and real wages fall, the amount of labour purchased must rise. This is why the concept is a bit unintuitive. This is also why ideas like “nominal illusion” and “unsustainable changes in employment” are used – and why data such as overtime hours, delayed retirement, and the gap between expected wage inflation and inflation are used to judge what is going on. (Note: Imperfection in the goods market gives us a great way to understand why a shift in AD may lead to firms increasing output for a fixed price – as it creates a “kink” in their MR curve. But although this increases labour demand, we need to understand why more labour is getting hired – is there rationing in the labour market, is their some trickery, or is their rationing due to imperfect good market competition and price expectations – this is all I mean by AS being a bit of a mind freak ).

Ahh I said expectations – expectations make all this stuff more difficult, so we are leaving it to the side while noting that adding expectations is incredibly important for considering these issues. In everything discussed below inflation expectations are fixed at zero, and no consideration of future expectations of output/income are taken into account.

However, this isn’t a lesson on the curves – Wikipedia will outline enough of that, or we can all just go along to an ECON101 course for a year. Instead, given that outline we want to think about migration while accepting the concepts embedded in these curves will capture real tendencies in the economy:

Migration AD-AS

Migration is a positive shock for AD – the AD curve will shift right. This implies that, for a given price level, the equilibrium level of output in goods and financial markets is higher. Think of it this way, someone moves here and they now want to buy things irrespective of their income – they need to cut their hair, they need to eat. This lift in expenditure leads to the process that shift AD right.

This shift then leads to more output for the same price level – except that firms will be deciding to change both prices and output due to this change. As a result we need to consider the idea of what firms will produce given the factors of production on hand.

That’s cool, but migration increases supply as well right – these people work! Yes, yes they do – but slow down for a second. What is our AS curve telling us? It is the price and output combinations of firms that maximise profit. We can simplify this idea by just saying that firm set a fixed margin on top of the cost of the final unit they produce when setting price, that labour is the only factor of production that changes in the short term, that wages are fixed but since the marginal product of labour declines as we make more the marginal cost of production rises.

Got that, yup those are the assumptions that give us our AS curve. If wages are fixed how do we get more people to work … well that is where we need to include short term assumptions. We can get people to delay retirement, people working overtime, we can trick people who are looking for work into thinking this is a different job than it is. None of these things are sustainable, but they can boost output now. Another thing we can include is saying that we do have wage growth, but it is slower than price growth, and labourers don’t realise that – so they think they are being offered a higher real wage when they are being offered a lower one (nominal illusion)!

Now if the wage is currently fixed, what happens to AS when we have an increase in the population! Well we need to split this curve in two a “short run” relationship where wages don’t change, or where wage growth doesn’t change at least, and a “long run” relationship where factor costs adjust until they have moved as much as prices (equilibrium with flexible prices and factors). We’ll call these short run AS and long run AS – or SRAS and LRAS for short. I realise that it is common to teach LRAS as just the top end of an overall AS curve but this is misleading for two reasons: 1) output can rise above potential, and LRAS is potential output, 2) shocks can influence LRAS and SRAS differently as patterns of production change following the supply shock, having two curves allows us to discuss that dynamic and the transition paths.

So we’ve said that AD curve will head right, but what happens to the SRAS. Well nothing at the old equilibrium point, that point just stays chill as firms are producing and using the factors of production they want to. What about when prices rise, well those points don’t change either as the “wage rate” is fixed on this curve (capital is fixed, so DMPL exists irrespective of the increase in the stock of labour). Instead what matters is how the process of wage changes comes into play! [Note: The idea that it makes the SRAS curve flatter at some points as it changes their ability to actually hire staff at a given wage is a fair one – and really illustrates how ugly a “fixed wage” argument really is for a lot of these discussions ].

Given that we have a tendency for rising prices and increasing output. This leads to a process that will eventually push nominal wages up, shifting our SRAS curve left!

But here is the kicker, the increase in the working age population due to net migration has also increase labour supply … moderating the increase in wages due to this process. Overall the SRAS curve can go where-ever it likes as long as it chases down our LRAS which has shifted. The question is then, which shift was bigger due to migration, the AD shift or the LRAS shift. Output rises overall, who knows what prices do, and the change in output per person depends on the relative productivity of migrants and the response of the economy to higher scale.

There is more factors of production now, so more stuff gets made. But the price level change is uncertain.

In NZ, economies of scale and our “high skilled” migration policies generally hint at migration increasing long-term incomes (the third bullet on this does some discussion there). This model tells us nothing about this, even though it is arguably what many people talking about it care about the most.

But the louder debate has been about monetary policy and current wage rates. And to discuss that we need an idea of the relative size of these shocks and their timing – why have the “pricing pressures” we would expect from a sudden increase in the population not occurred, and how is that consistent with other economic indicators?

In other words, why hasn’t there been inflation from such a big migration boom in New Zealand!

Monetary policy

Monetary policy shifts the AD curve, so following a migration shock the central bank will be looking to get that curve to match these shocks without undue variation in output and prices.

Employment based migration is boosting productivity/leading to rapid integration in the labour market (is this leading to higher MPL workers directly, or is there a corresponding capital flow – human or capital – which is used immediately?).

Quick integration of people with lower wage expectations – if the increase in labour supply due to migration exceeded the lift in labour demand once wages start to adjust, the wage and price pressures may be downward rather than upward in the transition to the long-run.

The return on New Zealand citizens who were already well integrated.

Monopsony in labour markets: If there are monoposony qualities to the labour market then firms WANT more workers at the current wage. As a result, the increase in labour supply can immediately translate into higher output.

These may have been the factors in the structure of the economy that changed the transition (in terms of inflation and output) relative to what the RBNZ expected.

Another potential explanation comes through expectations – there was a recognition that individuals moving into the country would eventually boost supply, and so people did not expect inflation to rise, or may have been unwilling to shift prices in opposing directions over a year. However, the reason I go straight to a labour market explanation is because of the high migrant employment – and high participation rate during all this.

In this way the RBNZ when describing this phenomena was NOT saying “migrants and holding down wages in New Zealand”. They were saying “the expected process of inflation following a migration shock did not occur as the structure of the economy differs from our expectations and experience, as a result inflation outcomes were lower than we expected and if we had known interest rates would have been set lower”. That is a perfectly reasonable point.

]]>13040Are real wages lower than 40 years agohttp://www.tvhe.co.nz/2018/09/21/are-real-wages-lower-than-40-years-ago/
Thu, 20 Sep 2018 20:30:08 +0000http://www.tvhe.co.nz/?p=13074While rolling around the internet I found the following:

Lets have a look shall we.

Interesting! But something seems a bit off – surely this can’t be true!? Let us investigate.

My studies have gone back to 1988 (when the QEX started conveniently) but I have noticed the difference between the PWI and QEX in the past and wanted a correspondence. Two points come up here – the ERN was published until 1986Q1 (with index figures on the Stats site) and the QES/QEX started in 1988Q1. Why was the PWI used for such a large section in the middle – also note the published PWI on the site is an index as well. My biggest query for this period has to be – why use the PWI and not the Employment Survey that QES/QEX replaced?

Looking at the data it is the middle series that looks most out of line with other data – although the 1970s data it quite interesting in of itself, it looks like it might be very methodologically different, being collected by the Department of Labour and not including a sex split until 1973. So lets look at the data history here on Stats NZ site. Although the wage data is on the site under Infoshare there is nothing on methodology – so a trip to the National Library is in order. That can be a future post

Constructing our own wage series

Hey, we can tell there are issues with the data here – but is there some way we can create our own wage series? Take the assumption that the levels are measured differently – but the “growth rates” would be the same irrespective of the measure we used. Taking that idea we can tie the data together.

First off I am going to stick to the series tied together here, but instead of using the periods of time mentioned I will kick the series off as soon as it is released. I am also going to include the Employment Survey (ES) to give us some idea of how much using the PWI “matters” for the result.

So to understand the data I have taken each index, and once the index starts I set it to the value of the prior index (except for the ES and QES which are both set to match the PWI when they start). What do we get?

Right. The PWI drives the result. Not just that, but both the ERN and ES behaved significantly differently – in real level terms – than the PWI. And in an issue that annoyed a lot of economists, the switch from ES to QEX saw measured average wages change – and there was no overlap between the two series to actually consider what was happening!!

What would a wage index look like if it followed the ERN, then switched to the ES, then switched to the QEX (assuming the real wage was flat rather than collapsing in a single quarter)? It would look like the following:

Why ignore the PWI? What was it measuring – from discussions I’ve been told it is a measure of labour cost, like the labour cost index. It is supposed to adjust for compositional changes in the types of jobs and work, and if it is like the LCI it would have tried to remove productivity improvements. What were the other surveys measuring – the actual hourly wage paid by firms.

Why would the real PWI have been falling? If goods and services prices are rising more quickly than the product wage it implies that the labour share is falling. In the 1970s the labour share of income had shot up, and this declined back from the late-1970s through the 1980s. As a result, we would expect a labour cost index to rise more slowly than consumer prices during such a period – and if there is any technological or productivity growth (which there was) that can lead to a situation where real wages are rising while the product wage, or wage paid per unit of output produced, is falling!

Real wages – in terms of peoples ability to buy goods and services from the wage they are paid for a job – are higher than they were in the 1970s.

Labour shares, wage rates, and NZ history

This real wage series fits nicely within the existence of labour income share (LIS) information for New Zealand. Something was fishy about the 1970s data, the labour income share and real wage data rose so quickly in the early 1970s to the point where I am not sure they are even believable! Even if they were, the chaos in the late 1970s and early 1980s which then led to reforms shows that whatever was happening was not sustainable.

Add to this concerns about the unemployment data (also shown in the slides). The unemployment data comes from a period where significant groups were not deemed as unemployed (such as a lot of women who would have been willing to work) and government job schemes (not just state sector employment, which was large, but direct job schemes for those who otherwise wouldn’t be working) were in place which may have allowed the government a mechanism to ensure that unemployed people wouldn’t show up in the statistics – prior to the reforms New Zealand wasn’t short on corruption and the manipulation of data. We may believe such schemes serve a purpose – but it does change your measure of unemployment!

So what is it, bad data or was it truly a mad economic time – would it upset you if I said it was a bit of both? These are issues I will write about in the future, I just wanted to put the idea in your head as a starting point

]]>13074Can we blame universities for inequality in educational attainment?http://www.tvhe.co.nz/2018/09/20/can-we-blame-universities-for-inequality-in-educational-attainment/
Wed, 19 Sep 2018 20:30:05 +0000http://www.tvhe.co.nz/?p=13048I can see where this article is coming from. Inequality in educational attainment can translate into inequality in incomes. If people from poor households have lower educational attainment then we have a generational link between low incomes, which implies lower income mobility. This is something that we may find unjust.

Why do I say “may”, well this depends on the cause doesn’t it – why does this inequality exist.

But I am from a low income area and I am not sure we can blame universities for the fact that they primarily have students from higher deciles.

When I was growing up I was repeatedly told university was a waste of time, and to look for a apprenticeship or undertake some type of vocational training. I was told that you only went to university if you already knew people, and that I would end up with no money and lots of debt. Attitudes may have changed in my hometown at this point, but I have heard similar stories from students who have come from small towns in recent years.

My unpopular opinion is that university entrance is not a particularly high bar for anyone with the capability to do the “highly remunerated” work mentioned in the NZ Herald article. If people from poor communities are not undertaking university education it is likely because those schools, those communities, and those families, do not believe that university is a worthwhile endeavour for them. The “long read” gives an example of this right up front, but to me that shows that the issue is almost entirely not about universities – and instead about varying communities attitude to undertaking higher education.

If opportunity is there and there is a failure it could be due to these incorrect expectations. But there may be other systemic issues that lead to less education by these groups. These are complex but we can have the following failures that we may view as relevant:

Peer-group effects: Wanting to do the same thing as your friend.

Family effects: Undertaking the same thing as your parents.

Low income insecurity: Being unwilling to take on debt because you view your life through the lens of low income, and have a different perception of risk associated with the student loan.

Low income family effects: Being unable to undertake investment in human capital as you are required to help within your family due to limited income – familial bonds are important.

Cultural effects: A community, or group, that identifies themselves either without reference to university education – or against it.

If that is a failure then we need to address it. If it is about expectations then we need to make the case to these communities and these groups that their children can succeed in such an environment. If it is one of the others then we need to consider how they are relevant and how to make sure there is a functional opportunity to get education.

Finally, we should also make sure we aren’t contradicting ourselves when we talk about how important vocational work is while also saying people should go to university. If vocational jobs are in such high demand people from low decile areas may be making good choices rather than simply chasing what they see as “status seeking” education …

]]>13048Bleg: Is this due to capitalism?http://www.tvhe.co.nz/2018/09/19/bleg-is-this-due-to-capitalism/
Tue, 18 Sep 2018 20:30:08 +0000http://www.tvhe.co.nz/?p=13063

I hear this sort of thing a lot – and want to hear your views. I will give a view in the future.

Also we used to just play Sim City 2000 in economics class at high school and I thought it would be cool if the individuals in the city followed rules – something they talked about for the latest Sim City but didn’t really do. So remember any model we build to explain this is sort of like that, just maybe less entertaining with a dearth of colourful sounds.